Saturday, November 12, 2016

The U.S. Court of Appeals for the Ninth recently held that if a creditor wishes to participate in the distribution of a debtor's assets under Chapter 13, it must timely file a proof of claim, and the debtor's acknowledgment of the debt owed to the creditor does not relieve the creditor of this affirmative duty.

The debtor filed a Chapter 13 bankruptcy petition. The bankruptcy court issued a notice with a deadline for creditors to file a proof of claim. The creditor was sent a copy of the notice with the deadline, as well as all versions of the debtors' Chapter 13 plan which was amended several times.

Four months after the deadline to file proof of claims passed, the creditor filed one secured and two unsecured claims with the bankruptcy court. After a hearing on the late filed claims, the bankruptcy court disallowed the claims because the proof of claims were not timely filed.

As you may recall, in a bankruptcy proceeding, a debtor must file a schedule of assets and liabilities and a statement of financial affairs. Fed. R. Bankr. P. 1007(b)(1). In order to participate in and receive distributions through a Chapter 13 bankruptcy, a creditor must file a valid "proof of claim" and go through the allowance process set forth in 11 U.S.C. § 502. In re Blendheim, 803 F.3d at 484–85. A secured creditor that does not wish to participate in a Chapter 13 plan, or that fails to file a timely proof of claim, does not forfeit its lien. Id.

A bankruptcy court may disallow a claim for many reasons, including if the proof of claim was untimely. 11 U.S.C. § 502(b)(9); In re Blendheim, 803 F.3d at 485. Here, the creditor admitted it filed its proof of claims late.

However, the creditor argued that the court should allow it take part in the plan because its debt was listed on the bankruptcy schedules. The Ninth Circuit BAP disagreed.

The Federal Rules of Bankruptcy Procedure provide that, in a Chapter 13 plan, "[a]n unsecured creditor or an equity security holder must file a proof of claim or interest for the claim or interest to be allowed." Fed. R. Bankr. P. 3002(a). The Ninth Circuit previously made clear that the language in the statute should be given its "plain meaning" and enforced accordingly. Gardenhire v. IRS (In re Gardenhire), 209 F.3d 1145, 1148 (9th Cir. 2000).

The Ninth Circuit noted that the debtor's schedules are used by bankruptcy courts to determine whether debtors are eligible for relief, and by creditors to determine if they want to participate in the plan. See Guastella v. Hampton (In re Guastella), 341 B.R. 908, 918 (B.A.P. 9th Cir. 2006); Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 785 (9th Cir. 2001). A creditor may chose not to pursue a claim after evaluating all of a Chapter 13 debtor's debts and the proposed repayment plan. Perry v. Certificate Holders of Thrift Sav., 320 F.2d 584, 589 (9th Cir. 1963).

The Court also noted that "[t]he proof of claim plays the important role of 'alert[ing] the court, trustee, and other creditors, as well as the debtor, to claims against the estate,' and the creditor's intention to enforce the claims." See In re Daystar of Cal., Inc., 122 B.R. 406, 408 (Bankr. C.D. Cal. 1990); see also Adair v. Sherman, 230 F.3d 890, 896 (7th Cir. 2000); Perry, 320 F.2d at 589.

The Ninth Circuit agreed with other courts that disallowed late filed claims even where the debt is listed on the debtor's bankruptcy schedules. See, e.g., Bowden v. Structured Invs.

The creditor argued that by listing the debt on her schedule, the doctrine of judicial admissions applies, and the debtor is required to pay all debts listed.

Judicial admissions are formal admissions in court pleadings which have the effect of withdrawing a fact from issue and dispensing wholly with the need for proof of the fact. Judicial admissions are conclusively binding on the party who made them.

The Ninth Circuit held that it has recognized the judicial admissions doctrine, but that it has never held that a bankruptcy schedule qualifies as a formal admission under the doctrine. The Court did not reach that issue here either.

Instead, the Court held that listing a debt on the bankruptcy schedules, even if it is a judicial admission, does not remove the requirement that a proof of claim be filed. The Ninth Circuit explained "Congress chose to require Chapter 13 creditors to file proofs of claims that demonstrate their intent to enforce their claims; a judicial admission by a debtor does not fulfill this strict requirement or its purpose."

The creditor tried to argue that listing the debt on the schedules was an informal proof of claim. "Creditors, failing to file a timely formal proof of claim, often assert that an informal proof of claim can function to establish the creditor's claims." See Cty. of Napa v. Franciscan Vineyards, Inc. (In re Franciscan Vineyards, Inc.), 597 F.2d 181, 183 (9th Cir. 1979).

"To qualify as an informal proof of claim: (1) the document must state an explicit demand showing the nature and amount of the claim against the estate, and (2) the document must evidence an intent to hold the debtor liable." Sambo's Restaurants, Inc. v. Wheeler (In re Sambo's Rests., Inc.), 754 F.2d 811, 815 (9th Cir. 1985).

In the Ninth Circuit, establishing an informal proof of claim requires among other things an affirmative action by the creditor within the required time frame. In re Bowden, 315 B.R. at 907 (rejecting argument that debtor's schedules alone suffice to establish an informal proof of claim). Here, the creditor took no affirmative action and relied solely on the bankruptcy schedules. The Court stated that the schedules do not demand or demonstrate the intent to hold the debtor liable.

The creditor further argued that the debtor's bankruptcy schedules constitute a debtor's proof of claim. However, the Court again did not agree. First, the bankruptcy schedules were not filed within the time period allowed for filing proofs of claim, and did not otherwise meet the requirements of Rule 3004. Second, the schedules do not qualify as a debtor's proof of claim. "Rule 3004 requires that debtors make an additional showing of their desire to include an unasserted claim in their Chapter 13 plan after receiving notice of which creditors intend to enforce their claims." No such additional showing was made by the debtor.

Finally, the creditor argued it would be inequitable if its claims are not allowed. The Ninth Circuit stated that even though it might not be fair, it noted that it previously "has repeatedly held that the deadline to file a proof of claim in a Chapter 13 proceeding is rigid, and the bankruptcy court lacks equitable power to extend this deadline after the fact." In re Gardenhire, 209 F.3d at 1148. Further explaining, the Court noted that it would be difficult for creditors to get a fresh start if creditors are able to continuously add claims after the deadlines expire. In re Goodwin, 58 B.R. at 77).

Accordingly, the Court held that in order to participate in distributions of a debtor's assets under her Chapter 13 plan, the creditor was required to file a proof of claim by the prescribed deadline, and the bankruptcy court properly rejected them.

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